How to Buy a Franchise: Ownership in 9 Steps

  • by Brandon Boushy
  • 2 months ago
  • Blog
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People discussing franchising at the table

Do you want to buy a franchise? 

Nic Reed and Sanford Booth have both purchased franchises, while Mike Andes has sold around 70 franchises. Nic and Mike share their experience in franchising at Augusta Lawn Care, while Sanford Booth shares his experience buying a Big Frog franchise.

We’ll explain the process of finding a good franchise, preparing to reach out to the franchisor, creating the documents you need, getting financing, attending a discovery day, and preparing to operate the company well.

What is a franchise?

A franchise is a business model with which the franchise owner, known as the franchisor, allows business owners to run a franchise location using their business processes, suppliers, and company name in exchange for paying franchise fees.

How is a franchise different from a chain?

There are several important differences between a franchise and a chain. A chain is owned by a single business entity, while a franchise is typically owned by multiple different business entities. A franchise may have corporate stores as well.

For instance, Augusta Lawn Care’s Founder Mike Andes owns multiple corporate locations as well as offers franchises. He told us:

I use my corporate stores to test new processes before passing them on to the franchisees.

Check out the video below that explains the differences between buying a franchise and starting your own business. 

Where can I find the laws governing franchising?

Franchises are governed by the Federal Trade Commission (FTC). They specify:

  • The features of a business that qualifies as a franchise:
    • Promises to provide a trademark or other commercial symbol 
    • Promises to exercise significant control or provide significant assistance in the operation of the business 
    • Requires a minimum payment of at least $500 during the first six months of operations. 
  • The laws franchises must follow.
  • The items included in the Franchise Disclosure Document
  • The items included in the Franchise Agreement.

Make sure to read the FTC guidance before buying a franchise.

Keep reading for the pros and cons of buying a franchise.

Pros and Cons of Owning a Franchise

As Mike told us, franchise ownership is not for everyone. There are some people that prefer to figure out everything and some who just want to increase their earnings without investing a lot of time learning.

Let’s look at the pros and cons of owning a franchise.

Pros

  1. All the systems in place
  2. Less to figure out
  3. Built-in mentors available
  4. More defined profit expectations
  5. Might have built-in customers

Cons

  1. Higher startup costs
  2. Requires less creativity
  3. Business strategies might not work in your area
  4. Annual or monthly franchise fees
  5. Service area is often dictated by the franchisor

Check out our interview with Nic Reed to learn more about the benefits of owning a franchise location.

He told us:

The nice thing about a franchise is I don’t have to figure out all the processes. Mike’s already done that. I just have to use his resources and see which (ones) work best in my market.

Keep reading to learn more about the franchise buying process.

How to Buy a Franchise You Love

When considering a franchise system, you’ll need to follow a specific process. There are nine steps to follow when buying a franchise:

  1. Research Franchises.
  2. Request the Franchise Disclosure Document.
  3. Go to Discovery Day.
  4. Apply for Financing.
  5. Review and Return the Franchise Agreement.
  6. Buy or Rent a Location.
  7. Get Training and Support.
  8. Prepare for the Grand Opening.
  9. Operate the Franchise.

Let’s start by researching franchise businesses.

Step 1. Research Franchises

Like any small business owner, someone who wants to own a franchise should do their research first. Opening a franchise is a huge commitment and the franchisor does a thorough review of each potential franchisee to make sure they meet the requirements to be successful.

You’ll want to be aware of typical franchise requirements and how to find good franchises. We’ll look at both to help you find the perfect franchise for you to start as a small business.

Typical Franchise Qualification Requirements

Prospective franchisees should be aware of the following requirements that most franchisors require:

  • Credit score: Most franchisors will require a minimum credit score. If you have a 680 or better, you shouldn’t have an issue. Use Credit Karma to check your credit score.
  • Net worth: Most franchise owners will require a minimum net worth of at least $100K, but estimates suggest that a new Mcdonald’s costs $2.3 million. It’s gotten so high, they only let new franchisees buy an existing franchise.
  • Liquid assets: You have to have enough liquid assets to pay the franchise fee without financing unless you are approved by franchise financing. 
  • Other income: If you want your own franchise, you’ll need outside income. It can take six months to a year without revenue. During that time you have to be able to cover the costs of opening a franchise.
  • Industry experience: You may need experience in the industry. If you don’t have it, you might want to go work in the industry before buying a franchise.
  • Management experience: Franchise owners may want prospective franchisees to have management experience because it improves the likelihood of becoming a successful franchisee.

Make sure to have documentation of your financial situation and experience ready before researching franchise opportunities. Each particular franchise has different requirements. Don’t spend a lot of time applying to become a franchisee

Keep reading to learn how to use the International Franchise Association (IFA) to evaluate franchise opportunities.

Check the International Franchise Association

Franchise association website

The IFA has a database that helps people find the right franchise out of more than 1,400 opportunities across the globe. The franchise search can be sorted by:

  • Industry: There are 15 choices including cleaning, business services, senior care, and food-related franchises.
  • Location: Global or any continent other than Antarctica.
  • Investment amount: $0 to $1 million. Make sure to reduce the highest amount unless you have $1 million to invest.
  • Opportunities for the military: Some franchise business opportunities offer benefits for Veterans.

Once you conduct a search, you can view different franchise business opportunities by age, startup costs, veteran discount ranking, or alphabetically. 

Be aware that some companies try to hide their franchise fee behind the total investment. There are some with no startup costs, but they might have total investments of $400K+. Meanwhile, most include their website information as well as startup and initial costs.

The point of mentioning this is that some franchised business opportunities are more disclosive than others. It is always easier to work with a management team that is fully disclosive. I personally would not consider a franchise opportunity that is not.

You’ll want to go through the franchise website and establish whether they are:

  • An established brand: Look at the number of followers on social media accounts and the reviews on sites like Google and TrustPilot.
  • Oversaturated: Do they have too much competition in your area?
  • Disclosive about their fees: Some will openly disclose their initial fee, royalty fees, marketing fees, and other costs on their site. Others won’t.
  • Offering training and support: Most franchises offer some business training and support to new franchise owners. It will normally be governed by the company culture and age of the franchise.

You can also try looking at some of these easy-to-buy franchises.

Easiest Franchises to Buy

The easiest franchises to start are typically:

Mike told us:

If someone works for an Augusta Lawn Care franchise for a couple of years, they qualify to buy a franchise without paying the initial franchise fee.

Once you have narrowed it down to one or two franchises, you can reach out to them to request the Franchise Disclosure Document.

Step 2. Request the Franchise Disclosure Document

Franchise disclosure agreement

This step includes gathering information that is not readily available unless the company is a publicly held company. The FTC  Franchise Rule requires a Franchise Disclosure Document that includes 23 items.

Necessary Elements in a Franchise Disclosure Document

  1. Company history, predecessors, parent companies, and affiliates.
  2. Officers’, directors’, and executives’ professional history.
  3. Current and past litigation involving the company and major players in the organization.
  4. Franchisor and management bankruptcies if any.
  5. Initial franchise fees and what impacts their costs.
  6. Ongoing costs such as royalty fees or marketing fees.
  7. The initial investment to get the franchise fully operational (in table form).
  8. Purchasing restrictions for equipment and supplies.
  9. List of franchisee’s obligations including a table showing where each obligation is in the Franchise Agreement.
  10. Terms and conditions of financing through the franchisor (if any).
  11. Any assistance the franchisor will provide including advertising, computer systems, and training.
  12. Description of the geographical territory the franchisee receives and whether it can be modified.
  13. How the brand’s trademark(s), service and trade names may be used by the franchisee.
  14. How the franchisee can use copyrights, patents, and other information.
  15. What, if any, participation requirements are expected of the franchisee. 
  16. Restrictions on products and services the franchisee may participate in.
  17. How to renew, transfer, and terminate the business arrangement. Also how to dispute conflicts between the franchisor and franchisee.
  18. Public figures that are employed by the franchisor and how much they are paid.
  19. Optional unit financial performance information.
  20. Location and contact information of all existing franchise locations.
  21. Audited financial statements for the past three years. 
  22. All the contracts that will be part of the formal contract including:
    1.  Franchise Agreement
    2.  Non-Disclosure Agreement (maybe)
    3. Non-Compete Agreement (likely)
    4. Supplier Agreements (common)
  23. Confirmation of receiving the FDD.

Most franchises will have a contact form on their website.

Others may request an initial consultation before providing the Franchise Disclosure Document. 

When considering starting a franchise, you should review all of this information before going for a discovery day.

Step 3. Go to Discovery Day

Discovery day is when you go to the corporate headquarters to meet the franchisor and their team. They show you around, explain how they operate, and give you more information on the business. 

A business owner should be looking for indications whether the franchise ownership is legit or just trying to make money through the franchise fee. Indications that the franchise opportunity may not be as attractive as it is on paper include:

  • Personality clashes
  • Cultural differences 
  • Corporate office being unprepared for the business owner
  • Statements that are not in the Franchise Disclosure Document
  • Not answering questions directly
  • Failing to address concerns
  • Pressuring you to enter a franchise agreement

If you’re ready to move forward, the next step is to focus on how to buy a franchise.

Step 4. Apply for financing

People sitting at the table

The process to buy a franchise is similar to buying a business. It is easier to get a small business loan for a franchise because they already have a proven success record. 

The franchisor may already have a deal with a bank to offer a small business loan to their new franchisee. When applying you will need to have:

  • A business plan
  • Documentation of personal finances
  • FDD to show lenders the average annual income and financial risk of the franchise
  • Proof of any assets you want to use for a secured loan

There are multiple options for funding when you decide you want to own a franchise. Some of the most common include:

  • Liquid capital: Using cash, stock, and bonds to finance your business
  • Secured loans: Using assets like a home, stocks, or crypto to secure a loan.
  • Business partners: The franchise contract might limit this option.
  • Business line of credit: Revolving credit that lets you borrow as needed and pay interest only on the amount outstanding. Great for preventing cash flow issues involving inventory and payroll.
  • Equipment financing: For large purchases like kitchen equipment.
  • Traditional business loans: 3-5 year loans to buy a business.
  • SBA loans: We’ll discuss using an SBA loan to buy business startups and franchises below.

Check out our Hub article for a more detailed look at how to fund a business or keep reading to learn about loans from the Small Business Administration.

Apply for Small Business Administration Loan 

The U.S. Small Business Administration guarantees loans called SBA loans. These small business loans have some of the most favorable lending terms because they are backed by the faith of the US government. 

When wondering how to get an SBA loan to buy a business or franchise, you’ll want to review the SBA’s guide. Three main types of SBA loans are available:

  1. (7)a loans: Up to $5 million for working capital, refinancing debt, and major purchases.
  2. 504 loans: Up to $5 million for construction projects, land, and equipment.
  3. Microloans: Up to $50,000 and cannot be used for construction or debt.

You’ll have to exhaust all other options before qualifying for SBA loans, but if you qualify they are definitely one of the best ways to buy a business. 

As long as you qualify for the funding, the next step in how to become a franchise owner is to review and return the franchise agreement. If you don’t qualify, then you’ll need to rebuild your credit, earn more revenue, or sell assets before you can buy a franchise.

Step 5. Review and Return the Franchise Agreement

Man sitting at the table reviewing documents

You’re ready to be your own boss. You just need to review the franchising agreement. Franchise agreements are very similar to the FDD, but they are legally binding contracts between the franchisor and franchisee.

If you haven’t already been working with a franchise attorney or other franchise consultants, you should probably hire someone who is well versed in franchise law. Any required fees will be well spent in exchange for professional help when you are learning how to start a franchise business.

Franchising.com lists the 10 provisions in Franchise Agreements. These elements are the parts of the FDD that both parties are contractually obligated to follow:

  1. Location or territory: What are your territory boundaries and exclusivity clauses? These will impact where to implement your marketing strategies and where you can do business.
  2. Operations: What operating procedures do you have to follow to own a franchise? The operations policies are a major portion of why people consider buying franchises. These are the best practices that take time and money to develop when starting from scratch.
  3. Training and ongoing support: What training and ongoing support is provided, who pays for it, and how much does it cost? Each program may be different, but the goal here is for you to be capable of running the business when you open the doors.
  4. Duration: How long is the contract valid? 
  5. Franchise fee or investment: What is the upfront cost and what does it cover? You should probably calculate the payback period based on other franchisors’ experience.
  6. Royalties or ongoing fees: What are the terms of ongoing fees and what do they cover? 
  7. Trademark, patent, signage: How are you allowed to use the franchisor’s trademark, patent, logo, and signage?
  8. Advertising, marketing: What advertising does the franchisor pay, and what advertising does the franchisee pay? If they require more than 8% of revenue for marketing, you might want to be cautious.
  9. Renewal rights, termination, and cancellation policies: How is the franchising contract renewed or terminated by each party? How are legal disputes handled?
  10. Exit strategies: Does the franchisee have the right to put existing franchises up for sale? Does the franchisor have to approve the sale of a franchise? Does the franchise have to let the franchisor offer a buyback? Is the only way to sell the franchise through the franchisor?

This is the last real chance you have to decide to back out of the agreement. Review the agreement documentation against the FDD with a legal representative. If there are any red flags, you may want to consider whether the opportunity is the best franchise to own.

Keep reading for information on how to buy a business location.

Step 6. Buy or Rent a Location

If you haven’t already, this is when you really have to ask, “How do franchises work?” and begin understanding what it means to operate one. When buying or renting a business location, ask the franchise to help with considering options. 

Some may tell you that increased foot traffic is best, while another business system might suggest you go with the lowest cost per square foot. Meanwhile, According to their 2020 Annual Report, McDonald’s owns 55% of the land and 80% of the buildings that franchisees utilize.

There will be different considerations based on whether you are operating a retail establishment, office building, restaurant, manufacturing, or service and install company. 

Read our blog about choosing a business location for more information.

Step 7. Get Training and Support

People undergoing a training in the office

You’ll have to go to the corporate training to learn how to operate the business. Corporate training can be anywhere from a couple of days to several weeks. They’ll typically cover:

  • Where to find resources
  • How to perform the customer-centric functions of the business
  • Introduce you to the software they use
  • Walk you through the accounting process
  • Train you on any machines that are unique to the company
  • Marketing tasks

After that, you’ll be preparing for the grand opening.

Step 8. Prepare for the Grand Opening

Now you can prepare the franchise location for opening day. There will be three aspects of opening the franchise:

  1. The location
  2. The inventory
  3. Marketing and advertising

Except for choosing the final layout, major preparations will likely be conducted by construction crews. I would discourage completing your own construction work unless you are well-versed in permits, building parameters, and timelines for such tasks. 

The layout may be driven by the franchisor or by you. Make sure you follow any requirements the franchisor has. 

Inventory should be entirely specified by the corporate office when opening. Afterward, they might allow you to make decisions about how to run the most profitable franchise in your location. They might have the inventory fully automated as well. 

You might have guidance from the franchisor about marketing, advertising, and setup, or you might need to reach out to other franchise owners to ask them what worked and didn’t work when they opened their specific franchise.

Remember to focus on getting the word out so when someone asks you, “How much do franchise owners make?” you can reassure them that it is worth it.

You’ve learned how to own a franchise, but there is still one more step. You have to operate it.

Step 9. Operate the Franchise

Once you reach this stage, you are just operating a business like any other. You’ll be serving customers, managing employees, handling accounting, marketing, and filing taxes.

We have a ton of interviews with franchise owners. Big Frog is a clothing printer that can give insight on how to own a franchise. Check out our interview with him below.

Buying a Franchise FAQs

Should you buy an existing franchise?

Yes, if it’s profitable. When you buy an existing franchise, remember to ask a lot of questions. Some franchise owners, like McDonald’s, will only let new owners buy an existing franchise because they want successful (experienced) franchisees to open new stores.

Ask the following questions before buying an existing franchise:

  1. Why are you selling your franchise?
  2. How long have you owned the franchise?
  3. Why did you originally buy the franchise?
  4. What’s the annual gross revenue? Is it growing or shrinking?
  5. How much profit have you made over the years? Is it growing or shrinking?

We include these questions and more in our blog 41 Essential Questions To Ask when buying a business. I suggest reading it for more information on why the questions are important.

What investment costs and franchise fees should I consider?

Initial investment costs are the costs that occur before the franchise draws revenue, but the franchise fees are what you pay directly to the franchisor. Initial investment costs can include:

  • The franchise fee
  • Forming an LLC or a Corporation
  • Business licensing
  • Buying or renting a location
  • Remodeling
  • Purchasing equipment
  • Purchasing inventory
  • Software not provided by the franchisor
  • Furniture for the franchise location 
  • Insurance
  • Marketing
  • Travel costs

What if I want to buy a franchise without money?

Most will not let you. They expect some actual investment. If you find one let us know, but franchises have requirements for:

  • Credit
  • Net worth
  • Liquid assets

If you have a high net worth but low liquid assets, consider getting a secured loan or creating a corporation with a rollover business startup (ROBS).

How much does it cost to buy a McDonald’s franchise?

According to the 2020 McDonald’s Annual Report, total development costs to open a new restaurant were approximately $4.4 million, but McDonald’s pays that and rents the equipment and land to the franchisee with a 20 year agreement. 

McDonald’s does not sell new franchises to new franchisees because they believe it protects their business to have experienced franchise owners open new locations. You’ll find a ton of answers online saying $45,000 franchise fee and $500,000 of liquid assets. 

In addition, you’ll be paying a 4% per year royalty to purchase a McD’s.

How much money can I make by owning a franchise?

Each year most franchisees make between $50,000 and $100,000 per franchise location they own. 

How should I prepare to buy a franchise?

Learn as much as you can before approaching the franchisor. Then prepare your financial statements that prove credit score, net worth, and liquid assets.

How does buying a franchise save money?

Buying a franchise removes most of the learning phase of business development. The franchisor has already:

  1. Created a business plan.
  2. Created branding.
  3. Conducted market research.
  4. Conducted product research.
  5. Created the business systems.
  6. Created a successful marketing plan.
  7. Proven the business model successful.
  8. Created the processes to follow.

All you have to do is find customers in your area and follow the rules.

Live Wealthily Ever After

At this point, we’ve discussed everything from choosing a certain franchise to writing a business plan, how to get an SBA loan to buy business assets, and the documents you’ll see when buying a franchise.

Once you’ve got a few years under your belt, you can start thinking about how to expand, hire more people, or buy more franchises. At this point, you have the information to start buying a franchise. 

What franchises would you like us to interview?

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